Making lemonade from a lemon

No landlord ever wants 176,089 square feet of specialized office and medical space to suddenly come to market, but in the case of Highwoods Properties Inc.’s Westshore property formerly occupied by Laser Spine Institute’s headquarters, the building owner may experience a happy ending.

That’s because the Class A vacancy rate in the Westshore office market in Tampa is among the lowest along the Gulf Coast. The single-digit Class A vacancy rate of 9.3% as of year-end 2018 ranks among the lowest in the entire Tampa/St. Petersburg submarket, according to figures from real estate researcher CoStar Group Inc. Large, contiguous blocks of space are even harder to come by.

At the same time, Class A rents of $33.52 per square foot are the highest in the metro area.

Highwoods officials say while the company’s abrupt decision to shutter on March 1 and lay off nearly 600 was distressing, the Raleigh, N.C.-based building owner is encouraged by the response to the space coming back on the market.

“This building has an ambulatory surgery center but it’s also corporate, Class A office space that is highly amenitized and in a great location,” says Dan Woodward, a Highwoods’ vice president in charge of the company’s Tampa operations.

“We’re very encouraged by the real estate fundamentals, because clearly there are not a lot of large blocks of space in Westshore, and by the outpouring of interest from the market.”

Woodward adds Highwoods will first seek a similar, medical-related use for the entire $56 million building, which opened in April 2016 at 5332 Avion Park Drive.

Competing Westshore developers — even those planning to construct new office space — agree that while the Laser Spine closure isn’t ideal, it also should have little long-term impact on development.

“In an unusual way, this may turn out to be a positive for them and for the entire Westshore market,” says Kyle Burd, a senior vice president and managing partner of Atlanta-based Cousins Properties’ Tampa holdings.

“We’re seeing a number of larger office requirements in the market, including some on a reasonably tight time frame,” Burd adds. “If they had to go, it was probably not a bad time for it.”

Nor does Burd expect that Laser Spine’s exit will affect Cousins’ plans to develop Corporate Center at International Plaza V, a six-story, 180,000-square-foot office building in Westshore, in the near future.

“I don’t think it will impact us. If anything, I think it might bring some business to Tampa that wouldn’t have otherwise come to the area,” he says.

Highwoods will take a bit of a financial hit, however.

The company says it will write off $12.2 million in the first quarter associated with the building’s notes and accounts receivable; lease incentives and straight-line rents receivable as of March 1. That money will affect Highwoods’ funds from operations (FFO).

At the same time, it will also write off deferred leasing costs of roughly $11.6 million as of March 1, which will impact net income but not funds from operations, a more critical real estate investment trust financial metric.

The company also intends to provide a more detailed update on its FFO outlook on April 23, when it releases first-quarter earnings.

For now, Highwoods is attempting to assess how best to move forward.

“This was an unexpected to us as it was to Laser Spine and its employees, Woodward says.